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LBTYA Acquiring Virgin Media

Media conglomerate Liberty Global Inc. (LBTYA) continues to dominate the European pay-TV market with constant acquisitions of major cable MSOs across the region. Its latest addition will be UK's leading cable MSO Virgin Media Inc. (VMED) for a total consideration of nearly $16 billion or $23.3 billion of enterprise value.

Liberty Global is expected to make a payment of $47.02 for every Virgin Media share based on its Feb 4 closing price. The company is expected to receive the payment in both cash and class A and class B shares.

Per the agreement, the company will pay each Virgin Media shareholder (totaling 335 million) $17.50 in cash, 0.2582 Liberty Global Series A shares (totaling 86 million) and 0.1928 Liberty Global Series C shares (totaling 65 million).

Both Series A and Series C shares of Liberty Global closed at $69.46 and $64.50, respectively on February Feb 4, 2013. The deal is expected to close by the end of the second half of fiscal 2013, subject to shareholders and other regulatory approvals.

At the end of its recently concluded quarter, Liberty Global has nearly $4.2 billion in cash and marketable securities and $26.5 billion of outstanding debt on its balance sheet. However, the company requires $5.9 billion in order to make cash payments to Virgin Media shareholders. So the required amount will be financed through a combination of debt financing and available liquidity of both Liberty Global and Virgin Media.

The deal, once materialized, will produce cost synergies of $180 million for Liberty Global apart from helping the company to establish a strong foothold in the BSkyB dominated UK market.

The UK telecom market is extremely competitive with low barriers to entry. Since its inception, Virgin Media incurred annual losses till 2010. Precipitous losses may create severe problems for the company going forward.

The UK government raised the value added tax (:VAT) in January 2011. Virgin Media may not be able to pass the full amount of the increased VAT to its customers as it may affect the company’s ARPU in the near term.

Moreover, weaker cash position of nearly $173 million and huge debt of more than $9 billion (with debt-to-capitalization ratio of 0.92) followed with network upgrade program initiated by the company may affect the company’s future growth prospects going forward.

Hence, the only option left with Virgin Media to counter such bottlenecks is to merge with Liberty Global where both will be in a win-win position.